5 Breakout Trades for Profits This Week - 44265 views

BALTIMORE (Stockpickr) -- It looks like the S&P 500 has found its footing -- finally.

Right now, the index of Wall Street’s 500 biggest stocks is sitting right above the trend line that connects the index’s 2009 lows with last summer’s intermediate bottom. From a technical standpoint, that’s a very significant level for stocks to sit on. And market participants are taking note.

From the end of QE2 to softening economic data, there have been a number of reasons to be a seller in June -- but rationalizing the selloff will only get you so far. Paying attention to the broad market’s technicals can be a whole lot more objective about where the market stands this week. Investors and traders alike would do well to keep a close eye on that support level that stocks are just a hair above right now.

Here’s the bottom line: A meaningful push below that secular trend line support level is a very bearish signal for the latter half of 2011.

Even though the broad market is playing a waiting game right now, there are still actionable trades to be made this week on a smaller scale. That’s why we’re taking a look at a handful of new technical trading setups that could provide some much-needed upside for investors this week.

Remember, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.

Investment research firm Morningstar (MORN) is having a fairly good year in 2011. Shares of the company have rallied more than 12% in spite of the broad market selling. Investors who missed the boat shouldn’t feel too bad -- a bullish trading setup could spell additional upside for this name in July.

That’s because Morningstar is in the process of forming an ascending triangle, a breakout trade setup that’s characterized by a horizontal upside resistance level with uptrending support below. Simply put, as shares of Morningstar get squeezed between those two technical price levels, the overhead supply of shares that forms that resistance level gets absorbed by buyers, and the potential for an upside breakout increases substantially.

Because Morningstar is a breakout trade, we’ll need to see shares actually surpass that horizontal resistance level (and hold there) before it makes sense to buy shares. When it does, consider a protective stop just below the 50-day moving average.

A somewhat similar setup is taking place in shares of Johnson Controls (JCI), one of the highest-yielding automotive stocks. While not an ascending triangle, Johnson Controls is forming a similarly structured breakout trade right now: a rounding bottom.

With a rounding bottom, shares are looking at a horizontal resistance level to the upside, and prices forming a “round bottom” below. That round parabolic price action indicates that trading pressure is shifting in favor of buyers. When shares surpass that previously-set resistance price, it’s time to take the trade.

Even though the setup in JCI is smaller than that of MORN, it’s still a high-probability trade if shares can sustain yesterday’s break above the “breakout level” in the chart above. The $41.50 resistance level on the chart above is the stock’s price target; keep a protective stop just below the 50-day moving average.

Recent IPO LinkedIn (LNKD) has been getting a lot of attention recently as one of a slew of hot Internet stocks to go public. I’ll admit, the recent Internet IPO craze has been a little foreign to me -- fundamentally, I think that these names (Pandora (P) included) are too expensive for this soft market, and speculatively, they lack the technical price action to identify supply and demand levels for shares. But that could only last for so long.

Now that LinkedIn has been trading for more than a month, this stock has some technically relevant price levels to take a trading setup. Shares found near-term support at $60 and made a previous resistance level at $85; it looks like we may see a test of that resistance level this week. If shares break above $85, speculative traders should buy in anticipation of a test of $100 (in that situation, plan on selling in the high $90s).

I still think that this is a fundamentally expensive stock -- and limited price action means that our technical understanding of investor sentiment is mitigated. I’m recommending this trade for the risk-hungry among us.

I mentioned earlier that indecision is the name of the game in the broad market this week -- so it makes sense to look at a downside setup as well. That’s why I wanted to show you the chart for Stryker (SYK), a stock that’s showing us a double-top pattern.

While many would-be traders are familiar with the double-top, one misconception is when the “sell signal” triggers for this pattern. This stock becomes a tradable short candidate when shares confirm a close below the support level being made by the trough in between the two tops. After a couple of false alarms in the last week, this stock is definitely in the danger zone.

As it happens, there’s a significant gap that occurred just below current price levels. That gap is important because it’s an area where no shares traded hands -- as a result, it signals losses for anyone who bought shares since the start of the year. That increases the chances for further selling on a break below support. Wait for a confirmed slide before shorting.

The stock in question is Lululemon Athletica (LULU), an apparel retailer that took the top spot in my rundown of potential setups a week ago. At the time, I said that it made sense to buy the stock as soon as it broke above $100. Following that advice would have yielded gains of 9.56% as of this morning’s prices. Now, the question is what happens next for shares?

Momentum clearly remains in LULU’s favor right now, even if the S&P continues to consolidate sideways. Technically, this stock’s minimum measuring objective puts a price target at around $115, a price that traders could definitely see this week. That said, in this market it pays to be tactical -- I’d suggest taking gains on the nearest signs of weakness in shares.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.